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MBA- I Semester (I Year)

Subject & Code: Economic Analysis for Business Decisions (102)

Q.1) a. Explain how principal agent problem affect on firms profit or value maximization

Ans : The significant discussion in business economics is principal-agent

problems in organizations. A principal is a top authority who hires agents to
act on his/her behalf, while an agent usually aims to achieve the objectives
of the principal. A principal-agent problem arises when the activities of an
agent impact on the principals interests. Although agents may seek to attain
the goals set by principals but may sometimes fail to carry out those targets.
The conflict between shareholders (as principals) and managers (as agents)
is a good example of principal-agent problem. When ownership and control
is divided between the principals and agents in an organisations this gives
the agents opportunity to pursue the goals that may not agree with the
desires of the principals.
A lot of principal-agent relationships may be found in human society such as
patients and doctors, shareholders and managers, managers and workers.
But shareholder manager and manager workers are the common
principal-agent problem relationships in a business organisation. Effects of
principal agent are such monitoring, flexible working hours, incentives,
division of labour and delegation of authority, part ownership, long term
contract, facilitation and support, efficiency wages.

Q.1 b) What might be the objectives of the following non-profit organization


Animal rehabilitation center.

A primary school

Ans. : Animal rehabilitation center.

Facilitate animal rescue and rehabilitation
Build a facility to house and rehabilitate seized and rescued animals
Operate a volunteer program for the general maintenance
and operation of the centre
Increase awareness of animal trade and its impacts on bio-diversity,
forest viability and communities

Improve awareness and understanding of climate change issues and

the connection to deforestation and biodiversity loss
Facilitate environmental education initiatives
Provide training facilities for conservation based workshops and

A primary school:

acquire literacy, numeracy, creativity and communication skills

appreciate and respect the dignity of work
develop desirable social standards, moral and religious values
develop into a self-disciplined, physically fit and healthy person
develop awareness and appreciation of the environment
develop awareness of and appreciation for other nations and
international community
instil respect and love for own country and the need for harmonious coexistence
develop awareness and appreciation of the role of technology in
national development
Q.2.a) Explain price elasticity of demand with suitable example.
Ans. : Price elasticity of demand (PED or Ed) is a measure used in

economics to show the responsiveness, or elasticity, of the quantity

demanded of a good or service to a change in its price. More precisely, it
gives the percentage change in quantity demanded in response to a one
percent change in price (ceteris paribus, i.e. holding constant all the other
determinants of demand, such as income).
The formula for price elasticity is:
Price Elasticity = (% Change in Quantity) / (% Change in Price)
Let's look at an example. Assume that when gas prices increase by 50%,
gas purchases fall by 25%. Using the formula above, we can calculate that
the price elasticity of gasoline is:
Price Elasticity = (-25%) / (50%) = -0.50

Thus, we can say that for every percentage point that gas prices increase,
the quantity of gas purchased decreases by half a percentage point.

Q.2.b) Explain experts opinion method and regression technique of demand

Ans : Expert opinion method: - Firms having a good network of sales
representative can put them to work of assessing the demand for the product
in the areas that they represent. Sales representative, beings in close touch
with the consumers are supposed to know the future purchase plans of their
customer, their reaction to the market changes, their response to the
introduction of new products and the demand for competing products. They
are, therefore, in a position to provide an estimate of likely demand for their
firms product in the area. The estimates of demand thus obtained from
different regions are added up to get the overall probable demand for a
Regression technique is a statistical technique for studying linear
relationships. [1] It begins by supposing a general form for the
relationship, known as the regression model. Typically, a regression
analysis is done for one of two purposes: In order to predict the
value of the dependent variable for individuals for whom some
information concerning the explanatory variables is available, or in
order to estimate the effect of some explanatory variable on the
dependent variable.

Q.3) Explain opportunity cost, marginal cost, incremental cost and suck cost with suitable
Ans. :
Opportunity Cost: opportunity cost is the cost of opportunity lost. Opportunity cost is the
cost of choosing one item of action in terms of the opportunities which are given up to
carry out that course of action. Opportunity cost is the profit lost by avoiding the best
competing alternative to the one chosen. The benefit lost is normally the net earnings or
profits that might have been earned from the rejected alternative.
Examples of opportunity cost are when the owner of a business foregoes the opportunity to
employ himself elsewhere; or a machine used to make Product X is said to have an
opportunity cost if the machine can be sold or if it can also make Product Y.
Marginal Cost : Marginal cost is an estimate of how economic cost would change if

output changed. Marginal means a first derivative, but in practice, because of

indivisibilities in plant sizes, we are often interested in the per unit change in cost
that will be caused by a substantial change in a future output, not of a one unit
Example : Transco builds 900 mm and 1,000 mm pipelines but has never considered
building 901 mm or 999 mm ones. Marginal costs involve forecasting, since they are
the differences between what was and what would have been with different outputs.
The consequence is that, even when the concept of marginal cost is completely
agreed in principle, its estimation involves far more than calculations founded upon
a set of rules.
Incremental Cost : Incremental cost is the cost associated with increasing
production by one unit. Because some costs are fixed and other variable, the
incremental cost will not be the same as the overall average cost per unit.
The cost figure can be used for a variety of economic calculations, most
notably the point at which increasing production ceases to be efficient.
A very simple example would be a factory making widgets where it takes one
employee an hour to make a widget. As a simple figure, the incremental cost
of a widget would be the wages for the employee for an hour plus the cost of
the materials needed to produce a widget.
Sunk costs are costs which cannot be recovered once they have been
incurred. Sunk costs are sometimes contrasted with variable costs, which are
the costs that will change due to the proposed course of action, and
prospective costs which are costs that will be incurred if an action is taken.
For example, when a car is purchased, it can subsequently be resold;
however, it will probably not be resold for the original purchase price. The
difference is the sunk cost.

Q.4) Explain regulatory role of RBI and state the functions of RBI.

Ans : In every country there is one organization which works

as the central bank. The function of the central bank of a

country is to control and monitor the banking and financial
system of the country. In India, the Reserve Bank of India
(RBI) is the Central Bank.
The RBI has different functions in different roles.
RBI is the Regulator of Financial System : The RBI regulates the
Indian banking and financial system by issuing broad guidelines
and instructions. The objectives of these regulations include:

Controlling money supply in the system,

Monitoring different key indicators like GDP and inflation,

Providing different tools for customers help, such as acting as

the Banking Ombudsman.

RBI is the Issuer of Monetary Policy :The RBI formulates monetary

policy twice a year. It reviews the policy every quarter as well. The
main objectives of monitoring monetary policy are:

Inflation control

Control on bank credit

Interest rate control

RBI is the Issuer of Currency :Section 22 of the RBI Act gives

authority to the RBI to issue currency notes. The RBI also takes
action to control circulation of fake currency.
RBI is the Controller and Supervisor of Banking Systems : The RBI
has been assigned the role of controlling and supervising the bank
system in India. The RBI is responsible for controlling the overall
operations of all banks in India. These banks may be:
The control and supervisory roles of the Reserve Bank of India is
done through the following: Issue Of Licence, Prudential
Norms,Corporate Governance, KYC Norms,Transparency Norms,Risk
Management, Audit and Inspection,Foreign Exchange Control, &

Apart from the above, the RBI publishes periodical review and data
related to banking.. Finally the control of NBFCs and others in the
financial world is also assigned with RBI.
Q.5) Explain role of SEBI.

Securities Exchange Board of India (SEBI) was set up in 1988 to

regulate the functions of securities market.
Ans :

Purpose and Role of SEBI:

SEBI was set up with the main purpose of keeping a check on
malpractices and protect the interest of investors. It was set up to meet
the needs of three groups.
1. Issuers:
For issuers it provides a market place in which they can raise finance
fairly and easily.
2. Investors:
For investors it provides protection and supply of accurate and correct
3. Intermediaries:
For intermediaries it provides a competitive professional market.
Objectives of SEBI:
The overall objectives of SEBI are to protect the interest of investors
and to promote the development of stock exchange and to regulate the
activities of stock market. The objectives of SEBI are:
1. To regulate the activities of stock exchange.
2. To protect the rights of investors and ensuring safety to their
3. To prevent fraudulent and malpractices by having balance between
self-regulation of business and its statutory regulations.

4. To regulate and develop a code of conduct for intermediaries such as

brokers, underwriters, etc.
Functions of SEBI:
The SEBI performs functions to meet its objectives. To meet three
objectives SEBI has three important functions. These are:
i. Protective functions
ii. Developmental functions
iii. Regulatory functions.
1. Protective Functions:
These functions are performed by SEBI to protect the interest of
investor and provide safety of investment.
As protective functions SEBI performs following functions:
(i) It Checks Price Rigging.
(ii) It Prohibits Insider trading
(iii) SEBI prohibits fraudulent and Unfair Trade Practices:
(iv) SEBI undertakes steps to educate investors so that they are able to
evaluate the securities of various companies and select the most
profitable securities.
2. Developmental Functions:
Under developmental categories following functions are performed by
(i) SEBI promotes training of intermediaries of the securities market.
(ii) SEBI tries to promote activities of stock exchange by adopting
flexible and adoptable approach in following way:
(a) SEBI has permitted internet trading through registered stock
(b) SEBI has made underwriting optional to reduce the cost of issue.

(c) Even initial public offer of primary market is permitted through

stock exchange.
3. Regulatory Functions:
These functions are performed by SEBI to regulate the business in stock
exchange. To regulate the activities of stock exchange following
functions are performed:
(i) SEBI has framed rules and regulations and a code of conduct to
regulate the intermediaries such as merchant bankers, brokers,
underwriters, etc.
(ii) These intermediaries have been brought under the regulatory
purview and private placement has been made more restrictive.
(iii) SEBI registers and regulates the working of stock brokers, subbrokers, share transfer agents, trustees, merchant bankers and all those
who are associated with stock exchange in any manner.
(iv) SEBI registers and regulates the working of mutual funds etc.
(v) SEBI regulates takeover of the companies.
(vi) SEBI conducts inquiries and audit of stock exchanges.